Syndicated loans are expanding due to many reasons including the look of the lenders to enter new markets and diversify their business investments. Moreover, the banking laws put certain ceilings to be observed in giving loans to any single borrower and because of this lenders join hands to share big loans portfolio. These instances allow lenders to engage in transactions which might otherwise be prohibited by regulations and lending policies. In addition, syndicated loans give lenders opportunities to access expertise and business relationships without the need to invest large amounts for marketing costs and administrative capabilities.
There are other benefits to lenders within a syndicate group as they give up the day-to-day routine decision making to the lead manager and the flexibility to make decisions independently and take unilateral actions with respect to the loan in favor of group decision making based upon agreed levels of common understanding and approval. Loan syndication facilitates low risk, which in turn allows lenders to provide credit at competitive terms. The syndicated lenders come forth with attractive loan facilities compiled under a single loan agreement, borrowers benefit from the reduced time and efforts. However, the relationship between the syndicate lenders and the borrowers are usually very different and depends on the merits of each case.
In practice, a syndicated loan is made by two or more lenders contracting directly with one single borrower under the same credit agreement with the lenders dividing the responsibility to lend the full amount of the loan. However, legally speaking, the single lender has a direct legal relationship with the borrower. Typically, one or more lenders will also take on the separate role as arranger of the loan and as agent for the credit facility and will assume responsibility of administering the loans for all lenders, including collecting loan payments and fees made under the notes and distributing to each syndicate lender its respective share. The arranger and agent are able to increase their profitability by receiving additional fees and compensation for such services. However, they have to be ready for such jobs.
In syndicated loans, financing is provided by each member of the syndicate to the borrower pursuant to a common negotiated agreement with each member of the syndicate having a direct contractual relationship with the borrower. Some other key provisions to negotiate in syndicated loans include assignments, enforcement actions, amendments and workouts, waiver rights, decision-making, information and notice rights, liability and standard of care on agent or lender, default and payment priorities, co-lender defaults provisions, each of which can have a significant impact on the co-lender.
As the attractiveness of loan syndications continue to increase, lenders and their legal advisors must be familiar with the legal issues surrounding such transactions. Specific attention must be given to the various terms or provisions associated to such venture and the negotiation of such terms to the benefit and best interests to each party.
Dr. AbdelGadir Warsama
LEGAL COUNSEL
Email; AWARSAMA@WARSAMALC.COM
